Through years and years of transactions, the traditional method of buying and selling Real Estate investments has evolved into a market of its own and has grown into a Real Estate machine that circulates massive amounts of money through Real Estate Agents, Real Estate appraisals, Title & Escrow Companies, Banks, and Mortgage Companies.
These once-simple real estate investments have grown from a modest fee for a professional to keep the Buyers or Sellers best interest in mind during negotiations, to now, traditionally, 6% (or more) of the total sales price being paid to Real Estate Agents (via Brokers who often take the majority of the money), another 3 5% being paid to Title, Mortgage and Escrow Companies for various fees, and then even more is taken for a real estate appraisal.
As if that weren’t enough, then a huge amount of money is absorbed by the Bank, through the form of interest payments usually over 15 30 years and totaling 2 3 times the original purchase price of the initial Real Estate investment!
Down Payments go to pay a variety of fees.
Now, dont get me wrong, it certainly is possible to make money through these methods, but the traditional real estate investment system is designed to simply break even for the home owner in purchasing a home (the first, and perhaps, only real estate investment they will ever make) in this manner. It is really not designed for the investor, who, of course, wants every real estate investment to make money.
Traditional funding only allows the Home Owner
to break even.
Example Home Owner Financing:
(the numbers represented here reflect the methods, not necessarily the price structures of any given real estate investment market.)
List price on property (with Real Estate Agent)
$200,000
Bank loan available (owner-occupied, 100% @ 7% interest)
$200,000
Monthly payments (over 30 years)
~ $1350
Taxes, Insurance, etc. (per month)
~ $250
(This example is for an average home in an average neighborhood, for the average American using an average interest rate of 7% of course, these figures do not apply everywhere.)
Therefore, the payment for this property is approximately $1600 per month for 30 years, to be paid by the home owner living in the property.
Now, the traditional real estate investment system allows for this home owner to have a change in their lives and decide to purchase another (usually larger) home. They have the right, and often do, rent out the first house and move into the new one with their family.
The owner will be responsible for any additional expenses (repairs, Home Owner’s Association fees, etc.) as well as their desire to make a small cash flow from this endeavor.
Their previous home now becomes a true real estate investment where they increase their ‘homeonwer’s’ monthly payment to the renter by an additional $200 per month, for a total price to the renter of $1800 per month.
Reasonable enough until/unless there are repairs to be made or, the renter leaves and the new landlord has to make payments on this vacant house. Then, this $200 positive cash flow per month real estate investment doesnt look so good.
But, the rent has been established for that house and the comparable rent for the area can easily be calculated using this method;
STANDARD RENT CALCULATION – (Simple Method)
Total payment for the property (includes Principle, Interest, Taxes and Insurance known as PITI at 100% loan at 7% interest)
+ cash flow for the investor (usually $200 per month)
= Rent
Note: With several homes in the area of similar size and style, plus the fact that most homeowners in the area have similar loan structuring, we can estimate that whatever the average loan percentage is will create a standard rental rate for X model real estate investment in this case, $1800.
A simple (and LAZY) way to remember it is;
PITI + $200 = STANDARD RENT
If an investor (one that seriously wants to make money from buying/selling Real Estate investments) wishes to purchase the same house in the same area and for the same amount of money, the traditional real estate investment system doesnt allow the investor to really make any money from the transaction.
